If allowed, what is my authority for reducing the payment amount by the effort performed by Government personnel?
Tempting as it would be, this is usually not a valid response. Later at closeout you will get a claim and you will pay. The real issue is faiure to perform. You need to get their attention otherwise it will get worse. Document file and send a Notice of Concern, start down the road toward a show cause etc. If you take no action you are delaying the inevitable. When the contractor knows they can be terminated for default they will seriously consider offering you consideration for extending the delivery date for the deliverable or service. If you think the situation, the failure to staff and maintain personnel can and will be resolved, then mutually modify the contract and contract type to a Labor hour or T&M type. You will have to get approval but the program office and you will now have far more control (absent staff cannot bill you). Develope your labor categories and hourly labor rates, (8 hours a day), Divide the monthly amount in line with the proposal .